Avoid the Pain Points in Trump Tariffs
More than 1,000 days into the current administration, there is no escaping that the “Trump tariffs,” as they have come to be known, have caused a significant hike in material costs on most construction projects. The tariffs on imported materials such as steel, aluminum, solar panels, lumber and plywood have caused suppliers to increase prices in response, which in turn have boosted the overall cost of construction.
The first waves of tariffs have passed, but many experts expect more—including hikes in existing duties and additional levies in new categories of materials. This is particularly so since the U.S. Supreme Court decided in June not to consider a trade group’s challenge of the tariffs’ constitutionality, essentially leaving unchecked President Donald Trump’s ability to impose more tariffs.
Contractors who did not lock in prices from suppliers before tariffs were announced have generally had to bear the brunt, since most standard-form contracts do not allow them to recoup higher costs that result. While it is difficult to predict when—or whether—these new levies will arrive, or how severe they will be, there are concrete steps that contractors and owners can take to avoid unwanted losses when the next wave comes.
As many contractors have already figured out, you can avoid much of the risk by locking in prices at the earliest possible date. Contractors who enter subcontracts and supply agreements at the same time they sign the prime contract eliminate the risk that unforeseen circumstances in the supply chain—whether tariffs, materials shortages or other—will force them to absorb an unexpected price hike.
Buying out the project at inception comes with some drawbacks, however. It may eliminate the contractor’s ability to take advantage of price drops that may occur, and also limit flexibility. Contractors will need to be more stringent about requiring formal change orders for owner-generated alterations in design, since the early materials purchase may cause any such change to affect existing subcontracts.
Contractors should also strongly consider including a “material cost escalation clause” in their contracts.
It allows a firm to obtain a change order to increase the contract price—or the guaranteed maximum price on a CM-at-risk project—when the price of any particular material rises above an established percentage, usually 10%. This still requires the contractor to bear the burden of ordinary and typical price fluctuations, but allows for relief in the event of major increases that neither party expected when the contract was signed.
Some owners may object to the price escalation clause, feeling that contractors are in a better position to protect against the risk, since they can subcontract early to avoid possible cost increases. But many owners readily allow these clauses to be part of the contract.
As the trade war has lingered, however, some owners have begun to fear they will miss out on the savings that will result once it ends. In that event, material costs may rapidly fall and owners may still be left with lump-sum prices—and guaranteed maximum prices—that reflect previously high material costs.
Accordingly, some owners now press for a “cost de-escalation” clause to protect themselves from losing the savings that will result when tariffs are lifted.
Such clauses, similar to escalation clauses, require that the owner receive—or at least share in—actual savings to be recognized if the contractor can buy materials for significantly less than expected, usually by more than a set percentage. In our experience, contractors who receive a cost-escalation clause in contracts are typically receptive to allowing the owner to have a reciprocal protection.
While most tariffs hit by surprise, sudden and severe cost escalations have occurred over time for many reasons. The painful lesson is that cost escalation or de-escalation is a real risk to consider in preparing and implementing construction contracts. There is no single solution for how cost escalation should be treated, but contractors and owners should always make a conscious decision on the issue before signing the contract.
Kenneth E. Rubinstein, an attorney at Preti Flaherty Beliveau & Pachios and co-chair of its construction practice group, can be reached at KRubinstein@preti.com. Gregory L. Silverman, an attorney who also is counsel for the New Hampshire State Senate, can be reached at email@example.com